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Abstract

When utility is specified recursively as a function of both consumption and money, real money growth becomes a common factor in addition to the market excess return and consumption growth. The risk premium on the money factor is negative because money complements consumption and is positively related to the stochastic discount factor. Growth portfolios, short-term loser portfolios, and long-term winner portfolios tend to have higher loadings on the money factor and, thus, earn lower premiums on money.